Distribution waterfall
A distribution waterfall is the sequence in which a fund's proceeds are allocated between limited partners and the general partner, typically return of contributed capital first, then a preferred return to LPs, then a catch-up to the GP, then the remaining profit split at the carried interest rate.
Example
A fund with a 20% carry and an 8% hurdle sells a position for $10M on $4M invested. In a whole-of-fund (European) waterfall, nothing goes to carry until all LPs have received their total contributions plus the 8% preferred return across the entire fund. In a deal-by-deal (American) waterfall, the GP may take carry on this deal's profit once this deal's capital and preferred return are repaid, subject to a clawback later.
Confused with
Carried interest. Carry is the GP's share of profit. The waterfall is the mechanism that decides when it is paid.
Hurdle rate. The hurdle is one tier in the waterfall, not the whole thing.
Related terms
- Carried interest Carried interest is the general partner's share of a fund's profits, typically 20%, paid through the distribution waterfall only after limited partners have received their contributed capital and, usually, a preferred return.
- Hurdle rate (preferred return) The hurdle rate, also called the preferred return, is the annual return, commonly 8%, that limited partners must receive on their contributed capital before the general partner is entitled to carried interest in the distribution waterfall.
- DPI (distributions to paid-in capital) DPI, distributions to paid-in capital, is the total cash and stock distributed to limited partners divided by the total capital they have contributed.